Strike Price – Meaning and Example

Strike price is the fixed price at which holder of a call option can buy the underlying asset irrespective of its market price until the expiration of contract.

For a put option holder, it is the price at which underlying assets can be sold until the expiration of contract.

The strike price is determined at the time of entering into a derivative contract.

In a call option, if it remains lesser than the spot price (market price), the holder can exercise the option to earn profit.

On the other hand, in a put option, the holder of the option can earn profit only if strike price is more than the market price.

Example of strike price:

On 1st January 2018, Mr A entered into a derivative contract to buy 100 shares of company XYZ Ltd at a strike price of INR 85. The expiration date of contract is 3 months i.e. 31st March 2018. On 1st of January the market price was INR 82.

Strike priceIn the month of February, market price increased from INR 82 to 97. Mr A has the right to purchase the 100 shares of XYZ ltd at a price of INR 85 or Mr A can wait for further hike in share price till the expiration of contract.

In the month of February, market price increased from INR 82 to 97. Mr A has the right to purchase 100 shares of XYZ ltd at a price of INR 85 or Mr A can wait for further hike in price till the expiration of contract.

Author: Vikas Yadav

Vikas Yadav is the chief author at MonetarySection. He is an MBA (finance) from NCU Gurgaon. He started his career in 2014 and at the same time he started this website to educate people about finance.

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